Interest rates
RateView : CRISIL's outlook on near-term rates
April 2022
Peak oil moved the needle in March
The yield on the 10-year benchmark government security (G-sec; 6.54% GS 2032) opened March at 6.81% and closed at 6.82%, within CRISIL’s forecast of 6.80-7.00%, and up 6 basis points (bps) from the February close of 6.76%.
The yield reached a high of 6.89% in the first week, in large part because of escalation of the war between Russia and Ukraine, and its effect on crude oil prices, which peaked at ~$139 per barrel. Also fraying sentiment was the Organization of the Petroleum Exporting Countries and its allies, or OPEC+, sticking to the schedule of increasing supply by 0.4 million barrels per day despite fears of a ban on Russian crude oil.
Between speculation of peace talks between the warring countries and elevated crude oil prices, the benchmark yield ranged 6.80-6.85% in the following week. Market participants also had to contend with a higher consumer price index (CPI) print for February of 6.07% — an 8-month high — thereby breaching the upper limit of the Reserve Bank of India’s (RBI) comfort zone, indicating inflationary pressure in coming months.
Domestic trading activity was limited ahead of an extended weekend and as US treasury rates added pressure after the Federal Open Market Committee’s decision of a 25-bps rate hike. Consequently, the benchmark was at 6.78% at the mid-month mark.
Towards the end of the month, while a hardening of US treasury yields on expectations of aggressive rate hikes in 2022 weighed on sentiment, peace talks between Russia and Ukraine tamped down a further hardening of yields in the domestic market. Crude oil prices settled at ~$120 per barrel as supply side worries eased amid lower-than-expected demand in China following a sharp rise in Covid-19 infections. Also putting downward pressure on crude oil prices was the US plan to supply 6 million barrels of the product from its reserves over six months. Added to this was the lack of significant domestic cues ahead of the financial year end. All this kept the yield ranged at 6.79-6.83% in the last week.
Meanwhile, market activity was limited ahead of the release of the government’s borrowing calendar for the first half of fiscal 2023. The indicative calendar for the first half of fiscal 2023 was released after market hours on March 31, showing government borrowing at Rs 8.45 lakh crore (of Rs 14.31 lakh crore budgeted — a record high gross borrowing).
On April 8, the MPC decided to keep rates and stance unchanged, while announcing new collateral-free standing drawing facility with a floor of 3.75% to manage liquidity. Also, the inflation forecast was revised to 5.7%, up 120 bps, and gross domestic product (GDP) growth forecast was lowered to 7.2% from 7.8%.
Analytica